September 9

The Risky Business of Product Innovation

If you develop a drug product, patent it, and bring it to market, are you required to continue to make it available for sale even if you have developed a better product to fill the same need? It depends on your reasons for bringing the new drug to market, your reasons for pulling the old drug from the market, and your means of converting the market to the new drug product. If you pull the drug from the market aggressively or even if you simply stop manufacturing it, you may be open to charges of anticompetitive conduct under the Sherman Antitrust Act. This is a result of the incongruous interplay between patent law, the federal laws related to pharmaceutical products, and state drug substitution laws.

Anti-competitive conduct & a monopolist’s duty to deal

Although the general rule of business in the United States is that a corporation (like a live person) may choose to do business with whatever other entities or people that it chooses, subject to specific regulations and discrimination laws, an entity that possesses monopoly power may have a duty to deal with its competition in certain instances. For example, the Supreme Court has ruled that a large ski lift operator in Aspen had a duty to continue to aid its rival ski lift operator by continuing to offer an all-Aspen ski pass because there the large operator had monopoly power and there was no consumer benefit or anticompetitive justification not to continue to offer the all-Aspen pass. See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

Hatch-Waxman and state drug substitution laws

The Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”), codified at 21 U.S.C. §§ 355, 360cc and 35 U.S.C. §§ 156 [**8], 271, 282, provides the legal framework for the interaction of branded and generic drug manufacturers. To encourage generic drug companies to enter the market and drive the costs of drugs down, the Hatch-Waxman Act simplifies the FDA submission process for generic manufacturers, essentially allowing them to piggyback on the branded drugs application for FDA approval.

The generic drug manufacturer asks the FDA to rate its product “AB” to an existing branded product. An AB rating is given when the generic drug is bioequivalent to the branded product and also has the same form, dosage and strength. State drug substitution laws provide that AB-rated drugs may be automatically substituted for the branded drug product at the pharmacy unless the patient’s physician indicates that no substitution may occur.

Branded drug products as monopolies

In the realm of branded drug products and generic substitution laws, advocates for generic drug companies argue that branded drugs with patent protection are monopolies. Once they are labeled as monopolies, they may have a duty to deal with their rivals unless they can offer a valid business justification for refusing to deal. In the pharmaceutical context, the duty to deal may include the duty to keep your branded drug on the market so that the generic drug has a reference for automatic substitution. It means, essentially, handing your market over to your rivals.

Foreclosing the preferred generic business model as anticompetitive behavior

In Abbott Labs. V. Teva Pharms., the Delaware district court held that under a rule of reason analysis the court should weigh the benefits provided by the new product with the anticompetitive harm imposed by removing the prior formulation from the market. Abbott Labs. et al. v. Teva Pharmaceuticals USA, Inc. et al., 432 F. Supp. 2d 408, 422 (D. Del. 2006). But the court assumed away the alleged benefits of the product improvement. Instead, the court held that because the cost-efficient means of competing in the pharmaceutical drug market for generic drug companies is to provide generic substitutes to the original branded product, Abbott’s act of preventing that substitution by introducing a new product “is sufficient to support an antitrust claim.” Id. at 423. The District of Columbia has adopted a similar rule of reason analysis. United States v. Microsoft, 253 F.3d 34, 59, 346 U.S. App. D.C. 330 (D.C. Cir. 2001).

In contrast, the test applied most recently in district court in California is merely whether the new technology or product provides “sufficiently legitimate innovation” over the previous generation product. Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group L.P., 2008 U.S. Dist. LEXIS 112002, at *42, CV 05-06420 MRP (AJWx),Master Case, (C.D. Cal. July 9, 2008). If so, it cannot be the basis for an antitrust violation. Id.

Taken together, the case law suggests that the only risk-free approach for a branded drug manufacturer is to never remove an old version of its product from the market in the face of potential generic entry, even if the company has developed an improved version of this product. But this solution is not particularly appealing for branded companies or their investors because selling and marketing two separate versions of the same drug product leads to inefficiencies and potential market cannibalization. Thus, the incentives are skewed so that risk-adverse companies may choose not to develop improved versions of their drug products because they may be forced to compete with their own old product if they do so.

There is another, riskier option. Branded drug companies with an appetite for some risk of litigation may choose to slowly remove the old version of the branded drug product from the market after the market shows a preference for the new version. If a branded drug company decides to take this option, it should be careful to establish that the new version of the drug product offers a bona-fide improvement (not merely a window-dressing change), that there are business justifications for removing the old product from the market other than maintaining the ability to charge a monopoly price (i.e. risk of consumer confusion, consumer preference for the new product, etc.), and that the decision to remove the old version of the product from the market is not simply a reaction to the threat of generic entry.

September 9

Key Features of the New Whistleblower Provisions of Section 21F of the Securities Exchange Act

On Friday, August 12, 2011, the United States Securities & Exchange Commission’s new Whistleblower Provisions went into effect. Here are the key points you should know if you manage a public company, work with securities, or have access to inside information concerning public companies:

Public Companies

The new provisions do not require potential whistleblowers to report a potential federal securities law violation to the company. Instead, the information may be given directly to the Commission and the company may not find out about the possible violation unless or until the Commission begins to investigate after receiving the tip.

The SEC Implementation Release notes that the interplay of the Whistleblower Provisions with the companies’ internal compliance procedures raises a “significant issue,” but the SEC decided against mandating internal reporting. Instead, the Provisions merely encourage internal reporting by treating voluntary compliance with internal reporting procedures as a potential factor to increase an award and treating interference with internal compliance procedures as a potential factor to decrease an award.

Essentially, the SEC does not want to put up any barriers to prevent information concerning potential violations of federal securities laws from reaching its doorstep. Thus, in a very real way, the floodgates have been opened. And public companies are on notice that they must develop a strong culture of internal reporting or face potential surprise investigations.

Potential Whistleblowers

Do you know about a possible violation of the federal securities laws? Do you have information about possible insider trading? Has the public company you work for committed accounting fraud?

You may be eligible for an award under the new Whistleblower Provisions if you provide the SEC with “original information” that “leads to a successful enforcement.” You will be considered to have met this criteria if you provide the Commission with information that is “sufficiently specific, credible, and timely to cause the staff to commence an examination, open an investigation . . . , or to inquire concerning different conduct . . . , and the Commission [brings] a successful judicial or administrative action based in whole or in part on conduct that was the subject of your original information” or if you provide original information concerning conduct already under investigation you may still qualify for an award if “your submission significantly contribut[es] to the success of the action.”

You may be entitled to receive an award for any action (including two or more related proceedings if they arise out of the same essential facts) in which the Commission obtains a monetary sanction of more than $1 million. The SEC will use its discretion in determining the amount of an award but the amount will be at least 10 percent and no more than 30 percent of the monetary sanctions that the Commission and other authorities collect.

You may be entitled to receive an award even if you took part in the securities law violation. Your culpability may be considered as a factor in determining the amount of any award you receive but it does not prevent you from receiving an award.

Additional Resources

United States Securities & Exchange Commission site —
SEC Whistleblower Information

NEWER NEWER 1 2 12 13